Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Clearwire Burns Cash, Churns Investors

Mobile mogul Craig McCaw's latest venture, wireless Internet service provider Clearwire (Nasdaq: CLWR  ) , raked in $600 million last week in its IPO. It sounds like a lot of dough, but Clearwire's shaky business model, fierce rivals, and expensive operations will likely require even more cash over the next few years.

Clearwire is the second-largest holder of the 2.5 GHz licensed spectrum, which reaches roughly 214 million people in the United States. The spectrum allows for data transfer speeds equivalent to wireline broadband, with far less potential interference than Wi-Fi or other wireless approaches.

The success of Clearwire's network depends upon the adoption of WiMAX technologies. If computer and mobile device manufacturers agree to use the WiMAX standard, the value of Clearwire's network should increase. The company has attracted $1.1 billion in strategic investments from Intel (Nasdaq: INTC  ) , Motorola (NYSE: MOT  ) , and Bell Canada.

That all sounds promising, but Clearwire's strategy is hardly unique. Sprint Nextel (NYSE: S  ) is deploying its own WiMAX network, while Verizon (NYSE: VZ  ) and other wireless providers employ competing technologies.

Clearwire's enormous investment requirements pose an additional problem. The company shelled out $300 million for 2.5 GHz spectrum rights from AT&T (NYSE: T  ) , and it will likely need to buy more spectrum. It also faces significant expenses in sales and marketing, customer service, equipment purchases, maintenance and R&D.

To finance these efforts, Clearwire has issued two secured notes, a term loan and a corporate loan, for a total of $755.6 million. Assuming no recapitalizations, the company will pay $84.3 million and $1.3 million in interest and principal, respectively, in 2007.

What business model does Clearwire offer to justify these expenses? The company sells one- or two-year contracts, including activation fees, monthly charges, and ancillary services like VOIP and Web hosting. For 2006, the company increased its revenue by $66.7 million to a total of $100.2 million, but on the bottom line, it sustained a $284.2 million loss.

According to its prospectus, Clearwire expects its losses to continue for some time. It predicts a whopping $800 million in cash needs for 2007 -- and that doesn't even include spectrum costs.

Even if Clearwire doubles revenues in 2007, the company will quickly devour its IPO proceeds, and it'll probably need to go back to investors for more. That's a scary prospect for investors, so it's not surprising that the stock is already volatile, with a 10% drop on Friday and another 8% drop in Monday trading. For Foolish investors, it's probably a good bet to stay clear of Clearwire.

You're cleared for further Foolishness:

Intel is a Motley Fool Inside Value pick, while AT&T was a former Stock Advisor selection. Sign up today for a free 30-day trial to any of our Foolish newsletters.

Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is ranked 1,474 out of 23,901 in Motley FOol CAPS.

Read/Post Comments (0) | Recommend This Article (49)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 523651, ~/Articles/ArticleHandler.aspx, 10/21/2016 11:23:08 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,078.56 -83.79 -0.46%
S&P 500 2,137.26 -4.08 -0.19%
NASD 5,247.97 6.13 0.12%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 11:07 AM
INTC $35.33 Down -0.11 -0.30%
Intel CAPS Rating: ****
MSI $73.39 Down -0.18 -0.24%
Motorola Solutions CAPS Rating: ***
S $6.61 Down -0.12 -1.71%
Sprint CAPS Rating: **
T $37.82 Down -0.83 -2.15%
AT and T CAPS Rating: ****
VZ $48.34 Down -0.81 -1.64%
Verizon Communicat… CAPS Rating: ****